Obama vs. Romney on Medicare

Until this week, Republican presidential candidate Mitt Romney had sought to make the election a referendum on just one thing: President Obama's handling of the economy. But by teaming up with Rep. Paul D. Ryan (R-Wis.), the architect of the House GOP's plan for cutting spending, Romneymade a campaign issue out of one of the government's biggest programs, Medicare. Sure enough, the attacks on Ryan's proposal to transform Medicare from insurance into premium subsidies began within minutes after Romney announced Ryan as his running mate.

Both Romney and Obama are seeking major changes to Medicare to rein in its runaway costs, which threaten to consume 20% of federal revenues by 2022. So when they promise to "preserve and protect" Medicare, as Romney did in Florida on Monday, they're talking about the idea of Medicare, not the program as it looks today. Significantly, both Obama and Ryan have called for holding Medicare spending to the same rate of growth in future years. The difference — and it's significant — is in how they would meet that target.

The challenge for Medicare is twofold. Thanks to the baby boom and advances in medicine, Medicare beneficiaries are growing in number and longevity. At the same time, medical costs have been rising far faster than inflation. The recession slowed the rate of increase somewhat, but the relief is likely to be temporary.

Obama's strategy for slowing the growth of Medicare spending revolves around the 2010 healthcare reform law, the Patient Protection and Affordable Care Act. The measure includes numerous provisions to promote more efficient, higher-quality care, including a new federal center to spur innovation in healthcare. It imposes new penalties for hospitals whose patients acquire infections, and launches a host of pilot projects aimed at giving Medicare doctors more financial incentive to keep patients healthy. As a fail-safe mechanism, it also creates a panel of experts that would recommend legislative changes in the program each year if costs grew more than the gross domestic product plus 1%. Those recommendations will automatically become law unless Congress adopts an alternative that is just as effective at controlling costs.

Critics latched onto the Independent Payment Advisory Board as a rationing "death panel," despite the law's explicit prohibitions on the board making proposals that would ration care, reduce benefits, decrease eligibility or raise out-of-pocket costs for physician and hospital care. Instead, the main options available to the board would be to reduce payments to doctors and, eventually, other healthcare providers, or to find ways to make Medicare more efficient.

In his budget proposal this year, Obama sought to slow the growth of Medicare even further by having the board recommend changes if the program's costs grew by more than GDP plus 0.5%. That's a huge vote of confidence in the ability of the healthcare law's pilot projects and other reforms to change Medicare, and it's not clear how realistic those expectations are — or how much savings the board could reasonably be expected to achieve.

Romney's Medicare plan makes a bigger leap of faith. He has said he would waive as much of the 2010 law as he could through his authority as president, and push Congress to repeal the rest. In its place, he would seek a premium-support system like the one Ryan proposed for those becoming eligible for Medicare in 2022 and beyond. Private insurers would compete with Medicare in a new marketplace, or exchange, with each offering coverage roughly equivalent to what Medicare offers. Instead of offering seniors Medicare coverage, the government would provide an insurance subsidy equal to the second-least-expensive offering in the exchange. Seniors who didn't want that particular coverage could use the subsidy to buy the less expensive insurance and keep the change, or sign up for more expensive coverage and pay the difference out of pocket.

This approach would put pressure on insurers to hold down costs. But they've had little luck doing so to date, in part because they don't have the leverage to force local hospitals and medical groups to curb their appetite for higher rates. Romney doesn't say what he'd do if insurers can't keep rates down. And neither he nor Ryan has made clear what they would do to contain Medicare costs if competition among insurers didn't do the trick.

No matter how it's structured, Medicare won't survive unless it finds a way to slow the rising cost of caring for elderly Americans. Romney argues that the program's inefficiencies are a product of the open-ended supply of federal dollars, a problem that could be solved by forcing insurers to compete for Medicare customers. That's part of the answer, but not the whole one. It's even more important to realign the industry's incentives toward wellness instead of treatment, to promote efficiency and innovation in care, and to encourage more coordination among providers. The 2010 law pushes the healthcare industry down those paths, which is why it's an important part of Medicare's future. For all the rhetoric coming out of the Obama campaign, the problem with Romney's plan isn't that he would "end Medicare as we know it." It's that he isn't backing the right changes.